Enhancing lending to the real sector of the Nigerian economy is the focus of a new regulatory directive released by the Central Bank of Nigeria.
Issued on April 17, 2024, with reference number BSD/DIR/PUB/LAB/017/005 and signed by the Acting Director of Banking Supervision, Adetona Adedeji, the directive signals a shift in the bank’s policy towards a more contractionary approach.
The loan-to-deposit ratio has been lowered by 15 percentage points to 50 per cent in accordance with the new measures introduced by the CBN.
This adjustment aligns with the current monetary tightening policies of the CBN and is a reflection of the increase in the Cash Reserve ratio rate for banks.
The loan-to-deposit ratio (LDR) is a metric used to evaluate a bank’s liquidity, comparing total loans to total deposits over the same period, expressed as a percentage.
An excessively high ratio could indicate insufficient liquidity to meet unexpected fund requirements.
All Deposit Money Banks are now required to adhere to this revised LDR.
Compliance with this directive will be assessed using average daily figures, as stated by the CBN.
In addition to encouraging robust risk management practices in lending activities, the CBN will monitor adherence continuously, adjusting the LDR based on market developments as needed.
Adedeji has urged all banks to acknowledge and accommodate these changes in their operations. He stressed the anticipated significant impact of this regulatory adjustment on the banking sector and the broader Nigerian economy.
Part of the circular reads, “Due to a shift in the Bank’s policy towards a more contractionary approach, the loan-to-deposit ratio policy needs to be revised to align with the ongoing monetary tightening by the CBN.
“Consequently, the CBN has decided to decrease the LDR by 15 percentage points to 50 per cent, in line with the increase in the CRR rate for banks.
“All DMBs are required to maintain this level, and average daily figures will be used for compliance assessment.
“While DMBs are advised to uphold strong risk management practices in their lending activities, the CBN will persist in monitoring compliance, reviewing market developments, and adjusting the LDR as necessary. Please take note of these guidelines.”